When The Music Stops: Jan 31, 2013

 

Lots more economic data out today.  Unemployment claims jumped 38,000 – much higher than expectations, but personal income also beat (thought to be explained by income shifting by those concerned about higher 2013 tax rates.)

Real Consumer spending is probably the data set that best settles the conflict — up an anemic 0.2% in December (real) versus 0.6% in November.  So, either everyone did their Christmas shopping early this year, or retail sales fell off a cliff.

Against this mixed picture, January Chicago PMI came out at 55.6 versus consensus of 50.5 and December’s 50.0 (revised down from 51.6.)  Employment and new orders shot up, but so did inventories (after contracting for several months).  While, deliveries, prices paid and backlogs continued to contract. In short, this looks like a rebound from the November slow down largely blamed on the fiscal cliff.

Also, not that this is a regional, not national, survey.  It sometimes offers a somewhat, but not always, predictive view of the important national ISM Mfg Index due out tomorrow.  In fact, many of the other regional surveys have shown increasing weakness.  The Chicago vs the national data are compared below.

The market sold off early following the employment data, but rebounded a bit as investors digest the PMI report.  All eyes are on the important data being released tomorrow:

Markit Flash PMI (covering about 85% of respondents) released on Jan 24 showed an acceleration of output, new orders and employment, but a deceleration of export orders, backlogs  and purchases.  Output prices barely moved, and inventories actually increased.

Remember, this is only a survey of purchasing managers.  So, it doesn’t, for instance, differentiate between an expansion based on overly optimistic expectations or one justified by an upturn in demand.  Thus, while it tracks mfg output (as reported by the Fed) in general, respondents’ perceptions are often more optimistic than was ultimately justified by actual outcomes.

We’ll revisit the data tomorrow, but for now it has the appearance of series of lower highs and lower lows, i.e. a falling channel.

There’s no telling what the economic data will look like tomorrow, let alone how the market will react.  But, it’s interesting that the last Flash PMI data, which was generally regarded as very positive, was good for an 8-pt rally on the opening (which was quickly negated for a flat close.)

I’ll also be keeping an eye on construction spending, which has been trending down as shown in the Briefing.com charts below.  Spending on commercial construction has been increasing at a declining rate for some time, and recently began contracting.

The rate of increase in residential construction also recently turned down, so it’ll be interesting to see if this is a trend in the making.

The market has been relatively quiet this morning.  After reaching the lower end of our upside target range yesterday, SPX broke through the red trend line and the white channel midlines we discussed, back-testing the white channel as expected.

Since then, it declined to test the next lower channel bound.  The pattern from here gets very interesting, especially when one considers the RSI channels.

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